avings and retirement plans (PPR), which were created with long-term savings and retirement in mind, offer tax advantages, both in what comes to personal income tax deduction and the tax on the capital gains generated.
In this article, we outline the tax framework for this savings instrument, as well as the extraordinary measures for 2023, which allow for PPR withdraws without penalty.
What are the tax benefits of a PPR?
To encourage long-term saving habits and regular cash contributions, PPR subscribers enjoy an advantageous tax regime, one of the main reasons for the popularity of this instrument.
There are two types of tax benefit associated with PPR: a benefit at the time of subscription or investment, called the "entry benefit", and a benefit at the time of repayment or withdrawal of the money, the "exit benefit". These benefits are described in Article 21 of the Tax Benefits Regulation, published in Decree-Law 215/89.
The entry tax benefit
It is possible to deduct 20% of the funds invested in a given year in PPR from the personal income tax for each unmarried taxpayer or for each spouse. This deduction has maximum limits, depending on the age of the subscriber:
- 400€ - holders up to the age of 35;
- 350€ - holders aged between 35 and 50;
- 300€ - holders over 50.
Therefore, in order to obtain the maximum benefit, the investment each year must be at least:
- 2.000€ - holders up to the age of 35;
- 1.750€ - holders aged between 35 and 50;
- 1.500€ - holders over 50.
The investor can take advantage of this tax benefit every year in which they make contributions or top-ups to the PPR.
For those who want to subscribe to a PPR just to benefit from this tax incentive, it's important to remember that the benefit is a deduction from the personal income tax, which means that if there is no tax, the benefit will be nil. If you don’t have a PPR already, it's important to perform a simulation of your tax return before the end of the year so that you can subscribe to this instrument if you realise it's beneficial.
If a holder has subscribed to a PPR and taken advantage of the tax benefit on entry, they cannot withdraw the money before the deadline or outside the conditions of the law (described below in this article), otherwise they will have to return the tax benefit with a 10% surcharge for each year.
How to take advantage of the entry tax benefit
The entities that commercialise PPR are responsible for notifying the Portuguese Tax Authority (AT) of the contributions made. As such, the "entry" tax benefit is automatically reflected in the personal income tax. However, if the investor doesn't want to benefit from this tax advantage (either because it doesn't give them any additional advantage or because they want to be free to move the money around in a shorter period of time, without penalisation), they can waive it by amending Annex H of the tax return. Read on about how to fill out your income tax return in Portugal in 2023 when you have a PPR.
So, if you want to take advantage of the entry benefit for the personal income tax deduction and you also want to have a PPR that you can manage freely, not necessarily within the time limits of the law, the solution may be to create two PPRs, and you only take advantage of the entry tax benefit in one of them.
The exit tax benefit
The tax benefits associated with PPR are not limited to the moment of subscription. In addition to the “entry" tax benefit, there are other advantages. On the one hand, capital gains are only taxed at the time of withdrawal, which allows interest to be fully capitalised. On the other hand, capital gains tax is low (between 8% and 21.5%) compared to other financial instruments (generally 28%).
Capital gains tax differs according to the term, or duration, of the investment at the time of withdrawal, and is lower the older the PPR. In fact, despite the name - "Retirement Savings Plan” -, it is possible to withdraw money from a PPR before retirement age.
Withdrawing money from a PPR can be done within or outside the conditions of the law. When outside the conditions defined by law, withdrawing the money from the PPR is penalised, namely the return of the entry tax benefit if it has been used, as mentioned above.
According to Decree-Law no. 158/2002, amended by Law n.º 44/2013, it is possible to withdraw money from a PPR, without penalty, in the following cases:
- Serious illness of the participant or household member;
- Permanent incapacity for work of the participant or household member;
- Long-term unemployment of the participant or household member.
In the abovementioned situations, there is no minimum period, as long as the contributions have been made before the condition occurred.
- From the moment the participant turns 60 years old;
- From the moment the participant retires due to old age;
- Participant or household member attending a vocational or higher education course that generates costs in the respective year;
- Payment of housing loan instalments for a property intended for own permanent residence (does not allow the loan to be amortised).
In these cases, the redemption must refer to contributions that are at least 5 years old. If you want to withdraw the entire PPR, this is possible provided that the first instalment is more than 5 years old and that more than 35% of the contributions were made in the first half of the contract.
Under the conditions set out in the law, taxation on PPR income (capital gains) is 8%. In cases of withdrawal outside the conditions of the law, the tax on PPR gains is:
- 21.5%, for PPRs that last less than 5 years;
- 17.2% for PPRs that last between 5 and 8 years;
- 8.6% for PPRs that last more than 8 years.
Thus, even if the withdrawal is made outside the legal conditions and in a shorter period of time, the PPR has a tax advantage when compared to other savings and investment solutions, in which capital gains are generally taxed at 28%.
Special conditions for withdrawing PPR in 2023
In light of the economic environment in 2023, which will be heavily impacted by rising inflation and interest rates, the government has established an exceptional regime, detailed in this document from the Tax Authority, which allows investors who hold a PPR to withdraw money to pay instalments of housing loans (for the purchase, construction or improvement of property or, furthermore, to housing cooperatives), with no limit on seniority or amount. With this measure, it is now possible to withdraw money from a PPR with less than 5 years' seniority to pay for these instalments.
This exceptional measure also allows withdrawals of up to €480.43 per taxpayer per month (equivalent to 1 Social Support Index - IAS), without any penalty, to cover the increase in general expenses. This refund is possible until December 31st, 2023, only for payments made before September 2022, when Law 19/2022 was published.
Coverflex allows you to use flexible benefits balance in Savings and Retirement solutions. Currently available is the PPR Poupança E, which can be subscribed to directly via the Coverflex app. However, the benefits balance can also be used to subscribe to other PPRs through the reimbursement feature.
